Tax planning for retirement

How is taxable income calculated in retirement?

One important change when you retire is how your taxable income will be calculated. This is because your money will come from different sources—government programs, your workplace plan, savings from registered or non-registered sources—each of which is taxed differently. We can put them in three categories:

1. Fully taxable—This includes money you saved in tax-deferred plans, such as a defined contribution pension plan, a Registered Retirement Savings Plan (RRSP), or a Deferred Profit-Sharing Plan (DPSP). Once you convert these to income plans, you’ll pay tax on the money you take out. This category also includes government programs such as the Canada or Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS). 
2. Partially taxable—This is the money you may have in non-registered investment accounts. The money these investments earn is taxable, including interest, dividends, and capital gains. Withdrawals aren't taxed.
3. Non-taxable—This includes your tax-free savings account (TFSA), where you don’t pay taxes on either the investment you earn or the money you take out, and the Guaranteed Income Supplement (GIS).
   Understanding the tax implications of these income sources and how they can work together will help you decide how to use each one and when.

What other factors could affect my taxes?

Besides income sources, consider your own situation and plans that may affect your retirement income and tax situation. Some examples:

• Your spouse—If you have a spouse, is your spouse retired or retiring at the same time as you? Team up on your tax plan. There are different income and tax strategies you can use to save both of you money, such as pension income splitting. It can also affect which income sources to draw from and when.
  
• Work after work—Are you planning to earn money in some capacity after you retire? This could add to your taxable income and may affect how you decide to use your retirement income sources.
• If you’re planning to live abroad—Know the tax implications of living outside of Canada and how it could affect the benefits you’re entitled to.

What should my retirement tax plan do?

Once you have a clear picture of your plans for retirement and the tax implications of your various income sources, you can decide how to use those sources in the most tax-efficient way. This means deciding where to take money from first, how much to take, and when. 

While there’s no one-size-fits-all approach, you generally want your plan to use a combination of income from taxable, partially taxable, and non-taxable sources to achieve four key things: 

1. Keep you in a low tax bracket—Try to stay in the top part of the lowest tax bracket possible to keep your taxes low. You can do this by limiting how much income you use from taxable sources and then topping it up with money from non-taxable sources to make sure you have the cash you need. 
   
2. Keep your taxes even year to year—It’s easier to manage your finances if you don’t have to deal with surprises, such as a big tax bill. No matter how much money you take out in any year, your strategy should help keep your tax bill in the same general ballpark from one year to the next. 
   
3. Work for the long term—Whether you continue working part-time for a while or you have big plans and need to draw on more of your income at some point, your tax plan should adjust to every stage of your retired life.
   
4. Avoid the clawback—This is also known as the OAS pension recovery tax. If your taxable income goes above a certain amount, you'll have to pay back part or all of your OAS benefit at tax time.  
   

Start on your retirement tax plan 

Your tax plan will be unique to your situation, but the goal should be to make your retirement savings last while funding the lifestyle you want at every stage of your retired life. Now that you know what you need to consider, a financial advisor or a tax professional can help you build the tax strategy that can help you achieve your retirement goals.